Part 1:

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $110 million on equipment with an assumed life of 5 years and an assumed salvage value of $20 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 million. This will have a 3-year life and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $24 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firms tax rate is 30% and the discount rate for projects of this sort is 8%.

Required:

a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.)

d. What is the IRR of the replacement project? (Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places.)

Incremental Cash Flow:$?? million per year

NPV:$?? million

IRR:??%

Part 2:

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $30.

Year	Unit Sales
1	36,000
2	44,000
3	13,000
4	7,000
Thereafter	0

It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of .20 36,000 $40 = $288,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $214,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firms tax rate is 30%. The discount rate is 15%.

a. What is the net present value of the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Net present value:$?

b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Increase in NPV:$?